The First Choice position
LIFE HAS been nothing if not eventful for First Choice group managing director Peter Long this year. After approaches by several companies, including Airtours, he and his colleagues on the First Choice board recommended a merger deal with Kuoni in March. On April 29, Airtours launched an all-paper hostile bid for First Choice, valued then at £852m and with the backing of 44% of First Choice shareholders.
Since then, more than 50% of First Choice shareholders said they wanted a deal with Airtours, but the European Commission decided to investigate the takeover on competition grounds.
Airtours was left with a stark choice – carry on with the purchase of First Choice and risk the wrath of the EC or pull out and wait to see the eventual outcome of the investigation.
Sensibly, Airtours has pulled out and says it will be back, but in the meantime First Choice will urge its shareholders to back the merger with Kuoni.
Before explaining that, Long cleared up some of the background to the dealings with Airtours. Airtours chairman David Crossland had suggested he felt insulted by his treatment at the hands of the First Choice board when he was attempting to do a friendly deal between the two companies (Travel Weekly, June 7).
Long said it was “absolutely inappropriate” to get into a public debate about the finer points of its discussion with Airtours, but he stressed that he and chairman Ian Clubb were very much a united force, acting in the best interests of shareholders.
He said he wanted to take any emotion out of the deal and said there was no personal animosity towards Airtours or Crossland. Long said they were not against the Airtours proposal and conceded that if it had got regulatory clearance it would have gone through as shareholders prefer it to a merger with Kuoni. But he always said the deal would be the subject of an investigation which would lead to uncertainty and damage the company.
“We announced we had a number of approaches and were constantly talking to people,” said Long.
“It’s not about rebuffing anyone. Our job as plc directors is managing and developing the business on behalf of our shareholders. Our overriding aim is to build and enhance shareholder value.
“The fundamental issue that we look at is that something may be a great idea, but is it do-able? It’s all about deliverability.
“The issue with Airtours is based around competition. Our lawyers advised us that trying to complete a transaction with Airtours was fraught with difficulties and it was highly unlikely that it could be delivered. Airtours thought the opposite.
“You have to make a decision. The deal with Kuoni would enhance shareholder value and is deliverable.”
If Airtours’ takeover plans had not been investigated, would he have recommended it?
“I’ll answer that this way,” said Long. “When Airtours announced its bid, it was supported by a significant number of our shareholders. As a board we can categorically say that we have put absolutely no obstacles in the way of the regulatory process that was undertaken.”
Current situation
First Choice has recommended its shareholders accept the merger with Kuoni because they believe it presents them with the best long-term opportunity.
Airtours has said it will be back for First Choice if the outcome of the investigation is satisfactory (see table below), but there are many uncertainties. It is not known what the EC will say or how much Airtours will bid if it comes back for the operator.
“It is our belief that the Kuoni merger is the best long-term value opportunity available to shareholders. That is what we will be telling shareholders,” said Long.
“There’s a double uncertainty with Airtours. The deal could be blocked by the EC and there is also uncertainty in terms of value. We don’t know what Airtours will offer if it comes back.”
First Choice shareholders will have to make up their minds within the next few weeks. If they reject the merger with Kuoni and the advice of their board, they will effectively be saying that they want the Airtours deal so badly they are prepared to wait.
But the flip side of that is Airtours will be the only option left and cynics have suggested that the Helmshore operator could reduce its bid when there are no other suitors.
And, of course, if the EC blocks the deal, First Choice will be left with nothing and will have to seek other partners.
“There is another alternative,” said Long. “We could carry on as we are. But the industry is going through the next level of consolidation and therefore scale is a factor. Our strategy has never been to stay as we are.
“We have always said we will look to expand geographically.”
There is a chance now that First Choice will not have to go through a prolonged period of uncertainty – this will only happen if shareholders reject the Kuoni merger.
“Our concern is protracted negotiations which results in uncertainty for our 5,000 staff. We want to resolve the uncertainty as quickly as possible.
“A prolonged investigation was clearly going to be damaging. The area where it is having a significant adverse affect on our business is the ability to recruit travel consultants.
“The bottom line is that our shareholders prefer the Airtours transaction.
“But they only prefer it if it is deliverable. It is not that they don’t like the Kuoni transaction, they just prefer the Airtours transaction.
“The Kuoni deal is a growth story. It doesn’t stack up against putting two comparable businesses together.
“However, you have the big regulatory bogeyman and we do not know whether Airtours can deliver to our shareholders a transaction or not.”
Long’s future
Whether First Choice ends up in the clutches of Airtours or pulls off a deal with Kuoni, Long and Clubb will be credited with having done an excellent job for their shareholders. They took over three years ago when the ship was not quite sinking, but taking in an awful lot of water. They’ve turned the company round, massively increasing profits and shareholder value.
“There’s no emotion in it. We’ve just done our job,” said Long.
He would become chief executive of the new Kuoni Holdings and Clubb non-executive chairman, but Long will not comment on his future if Airtours wins the day. It is thought Airtours would try to keep him, but if the position does not suit Long, he will be in demand both inside and outside the industry.
Clubb would not have a future with Airtours – partly because Airtours chairman David Crossland doesn’t need another chairman and partly because the outspoken Clubb is not flavour of the month in the north. But Clubb would also be in demand and it is rumoured he could resurface at his former employer, Thomson.
First Choice interim results
Long revealed the company is on target to increase full year profits by £10m to £60m in the year to October 31 1999.
The company’s half-year pre-tax losses to April 30 increased by £2.8m to £20.8m because the group has expanded since last year with the purchase of the Unijet group.
Long said the company was performing better than many of its rivals, with summer ’99 bookings 3% ahead of last year, compared with a market down 2%. First Choice also produced booking figures to support its claim that it is currently outperforming Airtours (see Clipboard, page 79).
Bookings for winter 1999/2000 are 28% ahead of the same time last year and by June 8, the company had taken 81,321 bookings for summer 2000.
Long said the group now had the equivalent of 331 shops, including nine hypermarkets and the shops owned or operated by its strategic retail partners. First Choice is aiming for 650 by the end of the calendar year.
It has 10 shops under the Travel Choice brand and Long claims it will have 50 by the end of the year.
Expansion in Asda superstores under the Travel Choice Express name is continuing fast, as predicted last year by Travel Weekly. First Choice has opened in 10 Asda stores and will open in a further 21 before the end of July. It has plans to have 100 Travel Choice Express shops.
The one black spot in the results was in Canada, where Signature Vacations reported a first half loss of £0.4m against a profit of £3.2m last year.
“We are performing well and that is a credit to everyone in the organisation,” said Long. “There’s a great spirit within our organisation and we’re all pulling in the same direction. We are the number two performing brand.”
The future of First Choice
lAirtours’ current bid for First Choice has lapsed but Airtours says it will be back for First Choice provided there is a satisfactory outcome from the European Commission’s investigation into the takeover. Normally a company is not allowed to resubmit a bid within 12 months, but Airtours is seeking permission to resubmit once the outcome of the ECinvestigation is known.
lFirst Choice shareholders must decide whether to wait to see if Airtours resubmits a bid; opt for the merger with Kuoni; or reject both deals and leave First Choice to carry on trading as normal.
lIn the meantime, the EC has until early October to make a decision on Airtours’ takeover of First Choice. It could block the deal or insist on any conditions, such as excluding First Choice’s airline Air 2000 from the deal.
lFirst Choice board has recommended to shareholders they support the proposed merger with Kuoni. The board has said there is too much uncertainty surrounding the Airtours offer – we do not yet know what the EC will say or what Airtours’ new offer for First Choice will be.
l If First Choice shareholders reject a merger with Kuoni, industry observers believe Airtours’ takeover of First Choice is a certainty provided the EC decides to allow the takeover to proceed. By rejecting the Kuoni deal, First Choice shareholders would be saying that despite all the uncertainty, they still prefer to wait for Airtours. If First Choice merges with Kuoni, Airtours will not bid for the enlarged company.